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Managing risk in 2009

Let us first have a short review of what happened in 2008. While corn prices rarely moved more than $1 within any year throughout the 1980's and 1990's, today's corn farmer saw price swings of more than $4 in 2008 alone.

Market volatility pushed prices to their daily trading limits dozens of times in 2008, and the market actually closed against the daily limits at least 20 times in the spring wheat market, 18 times in the corn market, and 16 times for soybeans. Producers who relied on elevators to do their pricing saw steep fees attached to that service, and in some cases, the inability to price their grain. On the flipside, producers who had their own hedging accounts and had the discipline to stay with their positions were able to take advantage of the high prices.

The wide range in prices in 2008 have opened the door for extreme volatility again in 2009, which means there will be profitable pricing opportunities, but also a continued need for effective risk management. The new year has brought new uncertainties about planting intentions, and there will be an acreage battle again this spring with wheat, corn, and soybean markets bidding for acres. While grain prices have dropped, costs for seed, fertilizer, and equipment remain high, making planting decisions more risky than ever before. Last year's late harvest and volatile prices are causing farmers to delay seed and fertilizer purchases, making this springs planting intentions even more difficult to predict. There will be weather scares; there will be surges in demand and there will be periods of poor demand. There will be technical buying and technical selloffs. The markets will continue to determine their own direction, as they have always done.

Price opportunities do not last very long, and flexible pricing strategies will be a necessity. Producers need to have a marketing plan that provides discipline for their sales but also includes flexibility to adapt to changing market conditions. That being said, we can talk all day about the importance of a marketing plan, but a marketing plan will do you no good if the market you sold into does not exist tomorrow (i.e. Verasun). Producers who have their own trading accounts can price their production without relying on the solvency of someone else's business. Don't get me wrong, this isn't always easy: A producer wishing to hedge his own production would need $40,000 per 10,000 bushels of corn if we have another $4 swing in prices.

Risk management has become more expensive with higher volatility, but it has also become more necessary to preserve profitability. Are you going to depend on the solvency of an ethanol plant or elevator when pricing your production?

Let us first have a short review of what happened in 2008. While corn prices rarely moved more than $1 within any year throughout the 1980's and 1990's, today's corn farmer saw price swings of more than $4 in 2008 alone.